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How a small company can make a big difference

Interview - April 19, 2012
Dr Layi Fatona, Managing Director of Niger Delta Exploration & Production Plc, realistically discusses the current situation in his country’s oil and gas sector and how small companies like his hold the power to change the scenario bit by bit

Nigeria is one of the world’s top oil producers, and of course Africa’s largest; the country’s development is driven by oil and gas. It continues to boast high levels of reserves and the prices have actually made a balance of payments surplus. This surplus is to be used in infrastructure projects. Could you please talk about oil and gas as an economic driver in Nigeria and how it goes in line with Vision 20:2020?

The petroleum industry is indeed the number one industry within Nigeria. Unfortunately, the country has allowed itself to be driven, in terms of contribution to GDP (Gross Domestic Product), essentially by this sector. I think in many respects that puts quite a bit of strain on how the industry sees itself and how it functions. To a large extent, it is evident that the Nigerian petroleum industry is still dominated by multinationals and that has a very strong historical linkage. But at the same time I think the Nigerian Independents are coming up, and happily so, although late as it’s going to be 54-55 years since Nigeria produced its first barrel of oil.
When one thinks that the multinationals still produce around 93 per cent of our daily production, you must agree that this is definitely not acceptable. In the context of the industry, I believe there is still so much progress to be made. As a matter of fact, Nigeria is going through its darkest period in the evolution of its petroleum industry. Look at the mess we find ourselves in at present and the revelations that evolve around this petroleum subsidy issue. Unfortunately, the industry has allowed itself to be taken over by people who have no business in the industry in the first place. Nonetheless, I still believe that the industry will continue to play a very major role in the net contribution to national development into the foreseeable future. That is why for us in the industry, we believe we have a very deep sense of national responsibility to do as much as we can under the law and within our resources because Nigeria is a very difficult terrain to play.
You have to have significant depth of finance at your disposal and one needs ample opportunities, with a long life. When you look at the Nigerian players, all those resources are very far away from our reach, which is the sad story of the Nigerian petroleum industry. The only way that I see it will effectively grow, nurture and domesticate itself is by the emergence of very serious-minded small to mid-sized Nigerian independent players, like NDEP Plc. I think it is a responsibility we owe to this country. And we want to do our best.
Nigerians will do it because we have no other place – this is our home. For example, when there is strife the strong IOCs will stay, and the weak ones will find it very easy to justify leaving. But for us, there is nowhere else to go except here. So it goes beyond national pride; we just want to do the best we can do as quickly as we can.

Regarding Vision 20:2020, analysts say it is a very difficult target with the country’s current growth, although high, it is not enough, and many challenges will still have to be addressed. Would you care to comment on the feasibility of this milestone?

I am sorry to say that Vision 2020, just like Vision 2010 is laced with elements of delusion and over-bloated targets. And the painful part is that those targets are set by people who, in my opinion, are not going to be part of the process to actualise them. When you look at the age profile of the people who set the Vision 2020, they are probably in their late fifties, so by the time they are 60 they are out of the way.
First of all, there has to be a re-engineering of who makes the plans. I think it is about time that Nigeria looks at the youthful workforce and youthful leadership. That probably excludes myself because of my age bracket; I am part of an aging fleet. Having said that, it is time for my children and their peers, who are very well-educated, to be the ones who will engineer the new Vision 20: 2020. I think unless government recognises that, we will always have visions that are never realised simply because the people who are making the vision are not the ones to implement it. I think the aforementioned represents a significant defect in the conceptualisation of any vision that Nigeria, and in fact most African countries, have put together.

What collaboration exists between indigenous companies and government bodies in order to capacitate new generations for when the time comes to take over?

I would probably say zero in a company like ours. When I look at the workforce in NDEP Plc it is a very young workforce with an average age of no less than 30. We are truly very proud that as a Nigerian company we are doing the very little that we can within our sphere of operations. We are not building rockets or space shuttles. We are producing oil from 12,000 feet, 13,000 feet. This is off-the-shelf technology, although of course it is laced with many new developments and concepts but I see the strength in our company and of the young workforce that we have implementing our work program.
How does this interface with government agencies? I think there is a disconnect here. I remember when I left university, it was very easy and there was a very good rapport between agencies like the PTDF and the industry, which worked in concert to mature people. But today I think there is a disconnection, so basically these government agencies have to interrelate more with industry. I think they should partner with the Nigerian independents in a totally new concept, to the point of literally forcing us to achieve things, so they can set targets for which one will be rewarded if one achieves and one will be punished if one misses them. Something that drastic has to be done in order to develop the young workforce.

Nigeria’s oil and gas capacity has increased from 28 billion barrels in 1999 to 37 billion barrels in 2011. Crude oil reserves have dropped due to declining explorations and other challenges such as lack of investment; but the government still sees the target of 40 million barrels being achievable this year. Would you say that is a realistic percentage?

It is the same story as with Vision 2020; the need to set realistic goals. The people who are going to implement those visions are not the ones who are setting them. I can tell you — I am in the industry — that target is unrealisable. Here is a country where, in the last five years, there has been no significant new investment and this is beginning to affect exploration. In fact, it has affected exploration in the last five years. If you look at our reserves in gas, they show a very strong index of measuring what investment goes into the industry. Traditionally, the Nigerian petroleum industry has never explored for gas, but we have noticed incremental gas reserves, which had flattened in the last five to six years. The main interpretation that you take from that index alone is that there has been no investment.
Now, here we are talking about gas development as a tool for raising the standard of living and infrastructure development, and yet I do not see a lot of capital investment going into all these things. To answer your question, yes, that is the target. Will we achieve it? It will be a huge challenge, shall we achieve it? I believe it is verging on the impossible.

What steps would you say need to be taken in order to revitalise exploration activities and investment in the sector?

One of the ravaging developments in Nigeria now, or non-developments now, is the issue of the Petroleum Industry Bill (PIB).

Will it be signed in the near future? It has been in the National Assembly for many years now.

It is a catch-22 situation. Even a bad PIB, is better than no PIB at all. We are all hungry for the PIB to be passed, the industry deserves it, the Nigerian Petroleum Act is old and it needs to be revised. Whichever way it is revised, there needs to be a mutual discussion between the regulators and the practitioners but that is not visibly happening. .

That is why right now it is stagnant.

Yes, and I strongly believe that to encourage this whole process again there is a very good olive branch from the government. Government promises that the PIB is actually viable; the industry needs to give this opportunity a chance. Everybody needs to unite and an environment must be created which will enable a very genuine and very deep conversation. It is not just going to be between government and the IOCs. It is going to be between government, IOCs, Nigerian Independents, civil liberty organisations and regulatory agencies. Everybody is a stakeholder in the Nigerian petroleum industry. The state of Nigeria needs a PIB as soon as possible.

How would you say uncertainty over the approval of the PIB has affected the industry?

No doubt it has, simply because of the uncertainties in which people are not able to determine what will happen to their investments, and justifiably so, in some circumstances investments are delayed. There are other parts of the world where brilliant opportunities are available. Look at places like Tanzania and Mozambique where investment cannot wait to have a home. There are places seeking investment with more investor friendly laws and regulation, obviously investment goes to these areas. I think that is the thing that Nigeria has missed these last five years. There has been no enabling environment to invest. Because of that, investments have been held back, generally, and in that process of being held back opportunities elsewhere have materialised. This is the current situation, I just wish I was in the position where I could influence this and make it progress quicker and easier.

I would like to talk about NDEP Plc and its operating company Niger Delta Petroleum Resources Ltd (NDPR) and its newly acquired license to operate a new mini refinery. What will this milestone mean not only for the company, but also for the indigenous companies and the national industry? It is by itself a great message of confidence.

When we took the decision to build a small refining capacity we were driven purely by the principles of self-sustenance. Two years ago diesel was selling at an incredibly high price and all our energy demands in terms of generators, drilling locations and so forth were heavily dependent on diesel. To make it worse, in addition to the high price, the purchased diesel was usually adulterated. This was beginning to adversely affect our business, so we decided to build ourselves something that would make us self-sustained. We saw the opportunity.

We thought that the 1,000-barrels-per-day topping plant just to take our crude and produce diesel would solve our problem. Halfway through the project, diesel was deregulated and we thought about adding a little more. We went back and told our story to DPR, and we ended up building a very small mini refinery. In terms of size this is not something to celebrate but when we finished and got the license to operate, it suddenly dawned on us that this is the first time this was done in Nigeria, which is a very significant step. It is the first such capacity that is not government-owned. That is the second significant aspect that you can extract from this event.

We have operated the plant for over three months and we have sold on average over a million litres of diesel every month. I think the impact it has had on the microenvironment and the economics of our areas of operation is very humbling. Every day I receive information about NDPR diesel not just going into Port Harcourt, which is what we thought would happen; but it is also going to places like Abuja. It has turned out positively for a very small independent Nigerian company and I think that as a model, if it works for us why should it not work for other small independent operating companies. I think the beauty of this is that you take a little production, you take a product and you put whatever is left back into your system. I think it is this closed-cycle that makes this a viable model. If 20 small independent Nigerian companies were producing four truckloads of diesel or kerosene a day, it would fill a void. I think, in a very modest way, it is a privilege for us to have achieved this small but yet significant milestone. A number of people have asked us how we did it. This plant was built for a very sizeable amount of money, at least from our cash flow, and it can be done again.
The feedback that I receive is it was conceived and implemented in record time. We built this topping plant, from start to finish in about 18 months. The fact it can be thought about, it can be put in place and it can be running and has done so efficiently for the last three months. When I hear comments from people coming to off-take, they are ones of absolute satisfaction. It can be done in Nigeria. That is the most important thing: we have demystified the fact that refining capacity, no matter how small and primitive it is, can be legitimised. I am told there is quite a lot of illegal refining taking place. I have never seen an illegal refinery but here is one that is licensed by the government and it is licensed to sell their products, so there is accountability and transparency. Like I said, it is not rocket science. This is great value, off the shelf, available technology. I think small companies like ours should look at this as a model.

You said it all started as a self-sustainable project. You are producing 1,000 barrels per day and you only use about a quarter of that.

Most of what we refine is available to be sold, so three to four truckloads a day means very little, but in the local environment it has a profound impact. The people who come to buy our products are industrial users and as soon as they found out this is a very regular and reliable supply of diesel they have returned time and time again over these last three months. For me this is a very exciting opportunity.

It is just a matter of time before indigenous companies start implementing the same type of project, would you not say?

I strongly believe so, because not only is it easily achieved, it is also affordable. I think that is the most important thing.

Could you comment on your Gas Processing Plant and your strategic partnership with NLNG?

This is one of those very unusual, conceptualised processes. NDPR’s Ogbele plant is the first plant that I know of that takes flared gas, as well as associated and non-associated gas, into the plant; produces LPG, (Nigerian mix of LPG); propane and the liquids as well, which go into our crude stream; and the dry-tail gas goes through our pipeline into NLNG. It is a 100-million standard cubic feet per day capacity plant and it is the first time an indigenous Nigerian Independent company will actually deliver gas to NLNG. It is a completely new strategic partnership between us and NLNG off-taking. This is a company that only restricts its off-take gas to its owner companies, NNPC, Total, Shell and Agip. Here we are a very small, unknown company joining the pack, which again is a privilege for us.

To build the plant to a technical level acceptable to NLNG is quite a demanding task, but we have succeeded. We are very proud of the plant. Hopefully, we should be able to introduce gas to the plant in the next one to three weeks. For me, the most symbolic event that will occur will be the elimination of gas flaring in this very small asset. It is not the gas plant itself, it is not the fact that we are delivering gas to NLNG, but in a very, very small way we have totally eliminated gas flaring in our asset. For me, that is the significant attainment.

In 2010 you achieved a remarkable increase of 24 per cent in the level of investment, and 29 per cent in the shareholder’s fund. Could you comment on the company’s excelling results in such turbulent times, and what plans you have for further growth?

I think we were assisted a little bit in the 2010 performance by increased production, as well as alleviating oil prices. We are very aware and calculative in our handling of finance, and I believe this is evident when we look at our cost of investment. We built a 100-million standard cubic feet per day gas processing plant for less than $100 million. So, I think it is project delivery and the costs of doing our investment that stand out amongst our achievements. This is because, to a large extent, we do not opt to go through the EPC kind of route, we are very much hands-on. We have a multi-tasking workforce, and I think to a large extent our performance will continue at this rate when you add the incremental value addition of being able to have self-sufficient diesel supply. All these little things add up. Again, we can only do the aforementioned because we are a very small company. For big companies this would be a waste of time.

But the size of the company, I should say, also plays in your favour in terms of quick decisions and, as you were saying, takes the right and the fast path.

I believe this to be in our favour. We have a very proactive Board of Directors. The Board consists of very seasoned people and we have a very lean management team, which complements our operations. Once the board approves a management-inspired effort, I think they let us run the implementation process. Again, I think the youthfulness of our workforce has also helped us. I think the growth of the company will continue like this for the next couple of years, with new opportunities, I think this company is really poised to keep growing remarkably.

The oil and gas sector is very technology-driven and innovative. What opportunities do you think exist for German companies?

I believe that one of the best drilling contractors we have ever had is a German company, KCA Deutag. Nigeria could do with ten more of these. The most important thing is that when such new companies come into Nigeria they must be in a position where they really want to partner with the right people, the right Nigerians. So, the areas of opportunity continue to be in the areas of drilling services delivery, focused for small Nigerian Independents. A company like NDPR will not be able to take a rig for five years, but if ten small companies like ours want a rig for six months of the year each, they add up. So, there are quite a lot of new opportunities for German investors in this area.
I know that engineering is one of the strengths of Germany. There is still an inadequacy of fabrication yards in Nigeria with all of the state-of-the-art tools. One of the major limitations is finding adequacy of tooling for the Nigerian establishment. We invest a lot of money — and when I say “we” I am talking about little companies — in finding the correct power tools for working. We spend a lot of money buying equipment. Therefore, we need a lot of ability to keep that equipment going for as long as they are designed. Partnerships with German engineering firms to keep those equipments going is an opportunity that I see right in front of us, as having big potentials.

I would like to finish the interview with your comments on your impressive CSR (Corporate Social Responsibility) programs through community engagements and Community Development Trusts, which are very revealing when it comes to seeing the impact you are having in the regions and the communities where you are established.

Several years ago, even before we got to the point where we could actually start any work in the field, we talked very deeply about what is responsible for the crisis within the Nigerian industry. It was very obvious that one of the grievances’ common denominator is a lack of participation by the landowners of areas where oil development work actually takes place. It is common sense that you cannot get people with very low incomes to invest in your company, so, we struck a balance. We created a Host Community Development Trust, where we pledged 5 per cent of our net profits. It is not to be shared; it is to be invested for the development of our host community. It did not make any sense when we started, but we kept conversing about it, trying to explain it and then it started making sense. I am very pleased that in the last six years the company has made a profit and every year 5 per cent of our net profits go to the Trust, for the benefit of host communities. Therefore, they suddenly recognise that they are part of our investment because they get their dividends at the end of the year.

It is like a shareholder.

Exactly. I think that has worked out in our favour. I am very pleased that in six years of production we never experienced one day of downtime because of community induced problems. In a very simplistic way, it is a model that has worked perfectly. Now, is it going to work on a much bigger scale? I strongly believe it will. For our next development it is the first item on the agenda, the Host Community Development Trust. It is a way to actually turn our host communities into strategic partners in our business. It is what I call the Niger Delta solution.
A corollary is that our host community has become not just part of our business; they are our protectors, they are the people who stand guard and speak for us simply because our interest is their interest. When we are successful they are successful.